Finance Ch.6

When you refer to a bond’s coupon, you are referring to which one of the following?A. Difference between the purchase price and the face valueB. Annual interest divided by the current bond priceC. Difference between the bid and ask priceD. Annual interest paymentE. Principal amount of the bond D. Annual interest payment
What is the principal amount of a bond that is repaid at the end of the loan term called? Face value
The annual interest divided by the face value of a bond is referred to as the: coupon rate.
On which date is the principal amount of a bond repaid? Maturity Date
Which one of the following terms refers to a bond’s rate of return that is required by the market place? Yield to maturity
The current yield on a bond is equal to the annual interest divided by which one of the following? Current market price
The written agreement that contains the specific details related to a bond issue is called the bond: A. indenture.
A registered form bond is defined as a bond that: C. pays coupon payments directly to the owner of record.
This morning, Jeff found a bond certificate lying on the floor of a bank. He picked it up and noticed thatthe bond matured today. He presented the bond to the bank teller and received both the principal andinterest payment. The bond that Jeff found must have been which one of the following? D. Bearer form bond
Miller Farm Products is issuing a 15-year, unsecured bond. Based on this information, you know that thisdebt can be described as a: C. debenture.
A note is: unsecured debt that is generally payable within the next ten years.
What term is used to describe an account that a bond trustee manages for the sole purpose of redeemingbonds early? D. Sinking fund
A call provision grants the bond issuer the: E. option of repurchasing the bonds prior to maturity at a pre-specified price.
The call premium is the amount by which the: D. call price exceeds the par value.
Dexter, Inc. has a bond issue outstanding. The issue’s indenture provision prohibits the firm fromredeeming the bonds during the first three years. This provision is referred to as the _____ provision. D. deferred call
Travis recently purchased a callable bond. However, that bond cannot be currently redeemed by theissuer. Thus, the bond must currently be: call protected
A protective covenant: limits the actions of the borrower.
Manning, Inc. originally issued bonds that were rated investment grade. These bonds have now beendowngraded to junk status. Which one of the following terms applies to this situation? D. Fallen angel
Which one of the following terms applies to a bond that initially sells at a deep discount and pays nointerest payments? C. Zero coupon
The price at which a dealer will purchase a bond is called the _____ price. E. bid
The price at which an investor can purchase a bond from a dealer is called the _____ price. A. asked
A bond trader just purchased and resold a bond. The amount of profit earned by the trader from thispurchase and resale is referred to as the: C. bid-ask spread.
Which one of the following is the quoted price of a bond? E. Clean price
Which one of the following is the price that an investor pays to purchase an outstanding bond? A. Dirty price
A real rate of return is defined as a rate that has been adjusted for which one of the following? A. Inflation
Which one of the following is the rate of return an investor earns on a bond before adjusting for inflation? nominal rate
Which one of the following refers to the relationship between nominal returns, real returns, and inflation? B. Fisher effect
The term structure of interest rates represents the relationship between which of the following? E. Nominal rates on default-free, pure discount bonds and time to maturity
The inflation premium: E. compensates investors for expected price increases.
Changes in interest rates affect bond prices. Which one of the following compensates bond investors forthis risk? C. Interest rate risk premium
The Treasury yield curve plots the yields on Treasury notes and bonds relative to the ____ of thosesecurities. C. maturity
Which one of the following represents additional compensation provided to bondholders to offset thepossibility that the bond issuer might not pay the interest and/or principal payments as expected? Default risk premium
Which one of the following premiums is paid on a corporate bond due to its tax status? Taxability premium
Which one of the following provides compensation to a bondholder when a bond is not readilymarketable at its full value? C. Liquidity premium
When a bond’s yield to maturity is less than the bond’s coupon rate, the bond: is selling at a premium.
The yield to maturity on a discount bond is: is greater than both the current yield and the coupon rate.
Which one of the following statements is true? A discount bond has a coupon rate that is less than the bond’s yield to maturity.
The value of a bond is dependent upon the: coupon rate and the yield to maturity.
Generally speaking, bonds issued in the U.S. pay interest on a(n) _____ basis. B. semi-annual
Which one of the following bonds is the least sensitive to changes in market interest rates?A. Zero-coupon, 10 yearB. 6 percent annual coupon, 10 yearC. Zero-coupon, 4 yearD. 8 percent annual coupon, 4 yearE. 6 percent annual coupon, 4 year 8 percent annual coupon, 4 year
An unexpected decrease in market interest rates will cause a: E. coupon bond’s yield-to-maturity to decrease.
Which of the following combinations is assured to decrease the interest rate sensitivity of a bond? Decrease in the time to maturity and an increase in the coupon rate
Which one of the following statements is correct? An indenture is a contract between a bond’s issuer and its holders.
Which of the following can generally be found in a bond’s indenture agreement?I. terms of repaymentII. names of registered shareholdersIII. protective covenantsIV. total amount of the bond issue D. I, III, and IV only
Which of the following characteristics are most commonly associated with corporate bonds issued in theU.S.?I. registered formII. bearer formIII. quarterly coupon paymentsIV. semiannual coupon payments B. I and IV only
Which one of the following might be included in a bond’s list of negative covenants? Limiting cash dividends to $1 per share or less
Which one of the following terms denotes for certain that a bond is unsecured? debenture
A bond for which no specific property has been pledged as security is classified as a: D. debenture.
Which one of the following statements concerning sinking funds is correct? Sinking funds may be used to purchase bonds in the open market.
A callable bond: may be structured to pay bondholders the current value of the bond on the date of call.
A bond has a make-whole call provision. Given this, you know that the: D. call price is inversely related to the market rate of interest.
What is the primary purpose of bond covenants? Lender protection
The primary purpose of protective covenants is to help: protect bondholders from issuer actions.
The lowest rating a bond can receive from Moody’s and still be classified as an investment-quality bond Baa
In relation to bonds, which one of the following terms has the same meaning as the term “crossover”? Fallen angel
Which one of the following terms applies to a junk bond that was originally issued with a bond rating ofAA? Fallen angel
Which of the following ratings indicate that a bond is low-quality?I. BaaII. BBIII. BIV. Ba C. II, III, and IV only
Municipal bonds are: generally callable.
Which one of the following individuals is most apt to purchase a municipal bond? Highly-compensated business owner
Zero-coupon bonds: create annual taxable income to individual bondholders.
A “floater” bond frequently has a: a put provision.
Which one of the following is a unique characteristic of an income bond? Coupon payments are dependent upon the issuer’s income
Which one of the following types of bonds should an investor purchase if he or she is primarilyconcerned about ensuring that bond ownership will increase his or her purchasing power? TIPS
Which one of the following types of bonds permits its issuer to forego paying interest payments if certainnatural events cause significant losses? C. CAT
Which one of the following statements is correct?Bond markets have less daily trading volume than equity markets.B. There are less bond issues than there are equity issues.C. Municipal bond prices are highly transparent.D. Bond markets are dealer based.E. Most bond trades occur on the NYSE. Bond markets are dealer based.
What is the price of a $1,000 face value bond if the quoted price is 102.1? $1,021.00
A bond dealer sells at the _____ price and buys at the _____ price. asked; bid
Which one of the following statements is correct regarding mortgage backed securities (MBSs)? Investors in MBSs are subject to real estate deflation risk.
The “R” in the Fisher effect formula represents the: nominal return.
An upward-sloping term structure of interest rates indicates: the nominal rate is increasing even though the real rate is constant as the time to maturity increases.
If inflation is expected to steadily decrease in the future, the term structure of interest rates will mostlikely be: D. downward-sloping.
If intermediate-term, default-free, pure discount bonds have a higher rate of return than either thecomparable shorter-term or longer-term bonds, the term structure of interest rates will be: humped
The term structure of interest rates is affected by which of the following?I. interest rate risk premiumII. real rate of interestIII. default risk premiumIV. inflation premium I, II, and IV only
Suppose that a small, rural city in the countryside of North Dakota plans to issue $150,000 worth of 10-year bonds. Which one of the following components of the bond’s yield will be affected by the fact thatno active secondary market is expected for these bonds? liquidity premium
Which one of the following bonds is most apt to have the smallest liquidity premium? treasury bill
A bond has a $1,000 face value, a market price of $1,036, and pays interest payments of $70 every year.What is the coupon rate? 7%
A $1,000 face value bond is currently quoted at 101.2. The bond pays semiannual payments of $27.50each and matures in 6 years. What is the coupon rate? E. 5.50 percent
A 6 percent bond has a yield to maturity of 6.5 percent. The bond matures in 7 years, has a face value of$1,000, and pays semiannual interest payments. What is the amount of each coupon payment? $30.00
A bond has a par value of $1,000, a current yield of 7.606 percent, and semi-annual interest payments.The bond quote is 98.6. What is the amount of each coupon payment? $37.50
A 5.5 percent $1,000 bond matures in 7 years, pays interest semiannually, and has a yield to maturity of6.23 percent. What is the current market price of the bond? C. $959.09
A $1,000 face value bond currently has a yield to maturity of 6.69 percent. The bond matures in 3 yearsand pays interest annually. The coupon rate is 7 percent. What is the current price of this bond? $1,008.18
Red Mountain, Inc. bonds have a face value of $1,000. The bonds carry a 7 percent coupon, pay interestsemiannually, and mature in 13.5 years. What is the current price of these bonds if the yield to maturity is6.82 percent? $1,015.72
A 6-year, semiannual coupon bond is selling for $991.38. The bond has a face value of $1,000 and a yieldto maturity of 9.19 percent. What is the coupon rate? 9.00 percent
A 12-year, semiannual coupon bond is priced at $1,102.60. The bond has a $1,000 face value and a yieldto maturity of 5.33 percent. What is the coupon rate? 6.50 percent
AB Builders, Inc. has 12-year bonds outstanding with a face value of $1,000 and a market price of $974.The bonds pay interest annually and have a yield to maturity of 4.03 percent. What is the coupon rate? 3.75 percent
The 7 percent annual coupon bonds of TPO, Inc. are selling for $1,021. The bonds have a face value of$1,000 and mature in 6.5 years. What is the yield to maturity? 6.59 percent
Best Lodging has $1,000 face value bonds outstanding. These bonds pay interest semiannually, mature in5 years, and have a 6 percent coupon. The current price is quoted at 101. What is the yield to maturity? 5.77 percent
The $1,000 face value bonds of Jasper International have a 7.5 percent coupon and pay interest annually.Currently, the bonds are quoted at 98.27 and mature in 3.5 years. What is the yield to maturity? 8.09 percent
Global Trade, Inc. has $1,000 face value bonds outstanding with a market price of $1,013. The bonds payinterest annually, mature in 11 years, and have a yield to maturity of 5.34 percent. What is the currentyield? 5.43 percent
The 8 percent, $1,000 face value bonds of Glenmore Foods are currently selling at $1,027. These bondshave 16 years left until maturity. What is the current yield? 7.79%

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